![]() ![]() New auto sales cycle is unlikely to be anywhere near its peakīulls point to the 5+ years of recovery in new auto sales and suggest that this is unsustainable and that the cycle has to peak in the near future. Despite generally negative sentiment for the state, said sentiment appears overblown. Stated simply, there is a bear case to be made for O'Reilly, but Texas deterioration is certainly not central to that thesis. As evidence, although Texas unemployment has edged higher, it is not as bad as compared to the 2008 crisis and appears to be recovering, as seen below. The bottom line is that Texas unemployment may see some pressure, but it is unlikely to be as striking as market participants seem to think it is. Moreover, only a small percentage of them are downstream oil businesses, which are certainly not immediately affected by the oil price depression Exxon's refining business is possibly the lone bright spot amongst its operating segments in recent quarters.Īs seen on page 2 of this trade publication, extraction of oil and natural gases contribute to ~3% of Texas employment, while petroleum refineries contribute to ~2.6%. While many energy companies may have a presence in the state, there are other industries that are also situated here. This may be true in the 1980s, but it is certainly not true in 2016. However, this theory makes the assumption that Texas is all about energy. With less driving, miles driven would experience a slowdown and vehicles would not wear and tear as much, decreasing the demand for aftermarket auto parts - i.e. And if unemployment heads north, people are unlikely to drive their vehicles that much - after all, driving to work is probably the most common activity which requires the use of a car. The theory is that the depression in black gold would lead to increasing unemployment in the state. Given the oil price depression, negative commentary from oil majors, and general market sentiment, market participants are clearly frightened about Texas. These 639 stores account for ~14% of the total store count - the Company's largest single-state exposure. The concern that potential longs may have is rather straightforward - O'Reilly has 639 stores in Texas as of December 31, 2015. Given the market's unsurprising fascination with everything oil-related in these recent months, it seems appropriate to get the Texas issue out of the way first. Management intends to drive the top-line through same-store sales growth, opening new stores, and selectively pursuing acquisitions. Demand for aftermarket parts is largely driven by three main factors - 1) vehicle miles driven, 2) average age and quality of vehicles, and 3) unemployment levels. independent body shops, multi-shop operators, etc). Sales are spread 60/40 between DIY customers and professional service providers (i.e. Shorting would be inadvisable, given the low visibility on timing, despite the presence of clear catalysts - y/y comp weakness and margin pressure.Īs a reminder, ORLY sells aftermarket automotive parts. In my view, longs might want to exit their positions in light of this information. Judging by the current ~30x earnings multiple that ORLY is priced at, it appears that the market has not taken into account a potential slowdown that may be just around the corner. Although Texas may seem to be a potential problem given the continued oil depression, a closer look suggests that although there is a bear case to be made for O'Reilly, Texas is not part of it. Moreover, channel checks (specifically, CarMax's quarterly commentary) suggest that the slowdown could surface in the Company's financials within the next few quarters. There is also a case to be made for long-term pricing pressure due to customer consolidation in the professional segment. it still has room to climb), and that the increasing average vehicle age is misleading on the surface and actually signals a slowdown. However, longs appear to be missing a couple of nuances such as the contention that new auto sales is unlikely to be anywhere near the peak of the cycle (i.e. Bulls point to a potentially-peaking new auto sales cycle and an increasing average vehicle age as justification for being long. ![]() Yet, the tailwinds that drove ORLY to these great heights appear to be waning, despite industry headlines suggesting otherwise. Once market participants figured out that selling aftermarket auto parts was a distinctly superior activity in a sector which is known for its high cyclicality, capital intensity, and low margins, longs piled on and never looked back. O'Reilly Automotive (NASDAQ: NASDAQ: ORLY) ("O'Reilly", "ORLY", or the "Company") has been a slam-dunk investment for shareholders so far.
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